Cash is King: Navigating COVID-19 (part 2 of 4)

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In part 1 of our 4 part article, we provided an overview on internal procedures, practices and “easy wins” that are benefitting our healthcare and nursery assets. In part 2, we explore the best-practices observed when it comes to reviewing financial performance and how good relationships with lenders can help provide additional breathing space to businesses during difficult times.

COVID-19 continues to enforce world-wide lockdown. This has caused significant and mounting stress on business owners who have to make a decision on running day-to-day business as usual, reducing operations or moth-balling their business.

In some industries, attempting business as usual is the only option. These businesses are playing a pivotal role in supporting the rest of the economy and the NHS. We are observing this particularly within our social care assets, whilst our nurseries business has re-programmed its operations to offer reduced services to the children of key workers. In both instances, an intrinsic focus on cashflow, KPI’s and regular contact with financiers is helping them continue to navigate the uncertain terrain of COVID-19.

Part two – Business finance and banking

KPI’s

All of our portfolio businesses now report KPIs weekly to their boards. We have also re-ordered these KPIs and introduced a number of new, short term, liquidity focused KPIs. For example, staff sickness, daily cash and Direct Debit cancellations are now critical. Reviewing these on a daily or weekly basis will allow you to respond most appropriately to the challenges ahead. This can help you make early decisions on when to reach out to agencies to cover staff sickness, when to commence conversations with lenders on cash requirements or which areas of your customer base are most impacted by business interruption.

Cashflow

Cash is king now more than ever. Forward-looking cashflows allow management to assess timing on large cash outlays, run sensitivities on when inflows are anticipated and what potential pinch-points or shortfalls this will create. Whilst most CFOs are correctly being prudent with their cash forecasts, it is important that these remain realistic so that business decisions can be made using the best estimate of future cash generation rather than over-conservatism, which will prevent business recovery once the worst of COVID-19 is behind us.

With this in mind, companies should remember that whilst there are currently a number of government-initiated payment holidays (PAYE, VAT, rates, etc.) to help ease the strain on cashflow, these will need to be re-paid at a later stage and should be included in any medium term cash forecasts.

Timing

With no clarity yet on how long COVID-19 will continue to impact the country it is important to pay attention to a number of time frames when considering cash. A 13-week cashflow is of paramount importance for a number of reasons; it highlights time critical cash shortages, immediate material payments and helps management assess viability of continuing the business at varying levels of operation throughout this period. This cashflow should be provided to lenders as part of any conversations.

Once you have suitably navigated the immediate complications presented by your 13-week cashflow, a medium-term cashflow should then be considered. This presents the 12-month impact caused by decisions to delay payments, agreements reached with lenders and the extrapolation of your KPI assumptions mentioned in the previous section.

Given the rapidly changing circumstances we are experiencing, cashflows and assumptions are often going out of date within 5 business days. Our management teams are updating both 13-week and medium term cashflows on a weekly basis in order to inform business critical decisions, provide updates to us as investors and also lenders. In order to report in this rapid manner to a number of different stakeholders, it is crucial that forecasts are simple, but robust.

Lenders

Banks and lenders are currently dealing with a colossal number of requests. It is essential that you make the most out of the limited time your lender will be able to provide you. Approaching lenders with a thought through proposal and a well-articulated plan is the best way to achieve what you need. Mitigation plans should be supported with a cashflow forecast that is driven by sensible assumptions including only the necessary detail. If lenders understand what the request is and have some clarity on the recovery of the business post COVID-19, you will be more likely to gain their support.

We have found answering ‘when, why, what and how’ instrumental in receiving the financial support required to keep our businesses moving forward. Providing a short-term 13-week cashflow is best for answering these questions. It allows you to highlight to your lenders when you think likely cash pinch points will fall, why those pinch points are impacting your cashflow and what levers you are pulling to protect the business.

Once you have presented this to your lender(s), you will be able to request what breathing space you require from them, however, there will need to be suitable rationale to the ask. This will be answered through the ‘how’, how your request will support your business through this period. Later conversations will also move towards how (and also back to ‘when’) you envisage repaying or ending the holiday period.

The ‘how’ section can be answered through the medium-term, monthly, cashflow. We have typically looked at a period of 12 months. Naturally, there is a huge amount of uncertainty currently in looking this far ahead. We have relied on management experience and their assumptions to provide a view. We are already getting some clarity as to the extent of the initial impact as we enter the third COVID-impacted week of trading and are incorporating these immediate learnings into our medium-term assumptions.

The key to achieving a positive outcome with any lender is to maintain an open and honest dialogue. Asking only for what’s required and communicating regularly when there are material updates that will help articulate your requirements to their Credit Committees is best practice. Being as proactive as possible in anticipating what information your lender will require to understand and approve your request will speed up the process between original ask and credit approval, buying you precious time.

Conclusion

COVID-19 is having an unprecedented impact on the finances of many of our portfolio companies. Our management teams are working tirelessly to regularly update information and ensure that the right decisions are being made despite the uncertainty we are facing.

Whilst the above suggestions require a lot of hard work, given the pace of change we are experiencing, we believe that these will not only help businesses survive the immediate, tumultuous conditions but also increase resilience and agility in the future. Furthermore, by implementing these suggestions now, we are putting our businesses in a suitable position to take advantage of the opportunities that will no doubt return once we are on the other side of COVID-19.